The stock market in pre-open trading continued to fall, the DJIA -750, NASDAQ -273, and S&P -89. The 10 yr is also moving, the 10 yr at 8:30 am ET 0.75% -16 bps. The initial trading in MBSs -3 bps from yesterday on the 3.0 coupon (2.5 coupon +13 bps).
At 8:30 am ET, February employment headlines were better than forecasts; the unemployment rate declined to 3.5% against estimates of unchanged at 3.6%. Non-farm jobs were expected +177K as released +273K, private jobs at 228K were expected at 155K. Average hourly earnings +0.3%, yr/yr 3.0% as expected. Manufacturing jobs, the segment of the economy that is the weakest, expected -5K increased 15K. The February news mostly precedes the coronavirus fears.
The reaction to the better employment report didn’t change the stock index trading. At 9:00 am ET, the DJIA still down 750 points, and the 10 yr note yield held at 0.74%.
At 8:30 am ET, January US trade deficit expected at -$46.1B reported at -$45.3B.
The 10 yr note is in freefall, continuing to make all-time lows. It’s like the stock indexes three weeks ago, making new all-time highs daily. Concern about the global economic and financial impact of the coronavirus spurred demand for havens and traders amped up bets on further central bank easing this month. More scary news overnight, The number of coronavirus cases globally approached 100,000, as more infections were reported in the US, Germany, and South Korea. Singapore warned of a global pandemic, and Britain’s chief scientific adviser said a vaccine could take as long as 18 months to develop. In the panic overnight, the 10 yr dropped briefly to 0.69% -23 bps from yesterday, it didn’t last long, and the 10 yr moved back up to 0.77% by 7:00 am.
The increasing outlook for lower rates is gaining momentum. Traders are betting the Fed will have to do much more. Fed funds futures contracts now indicate that the Federal Funds rate will drop to less than a quarter of a percentage point in the second half of this year (currently 1.00% to 1.25%). And more than half a point of additional easing is priced in for this month alone when the FOMC meets on the 18th. There is also the strong belief that the Fed will begin another round of QEs, and other central banks also expected to introduce their own plans for QEs.
Economists expect the People’s Bank of China, Bank of Japan, European Central Bank, and Bank of England to move this month. On the other hand, the question is increasing about what good the lower rates will do to stop the belief that the world economic outlook is worsening. “There is immense pressure on us to act – from markets, the media and the Fed’s cut – so in the end, we may be forced into an emergency move, but we’ll try to resist,” a source familiar with the European Central Bank’s thinking said. …. “But we’re not even sure what we’re acting on. Nobody knows the actual impact.” The BOJ has already pledged to pump more liquidity into markets and speed up asset purchases to calm nerves. Sources close to the ECB, meanwhile, said the bank was looking to provide lending and liquidity to small- and medium-sized firms affected by the coronavirus outbreak.
Going into this year, the economic outlook was very positive, and markets were anticipating 2020 growth would exceed 2019 (2.1% GDP). Stocks across the board making new highs daily, then came CO-19 that has evolved into a global panic. The equity markets were at excesses at the levels going into February, but investors were convinced growth was a certainty, of course, that is out the window for now. The Fed added to the fears and more selling when it shocked the world by cutting rates by 0.50% last week, two weeks before a regularly scheduled meeting; that cemented the current panic that is gripping US and global markets.
Sources: TBWS
